University:
Baltimore City Community College
Course:
ECO 201 | The American Economy I: Macroeconomic Theory
Academic year:

2024
Views:

460

Pages:

2
Author:

Danny A.

Segments of the Aggregate Supply Curve The slope of the aggregate supply curve differs depending on how much slack there is in the economy at the beginning of a year (or any other production period). The aggregate supply curve drawn in Box 6 has been divided into three distinct segments for corresponding levels of real GNP: Segment 1: The economy is operating well below its potential with considerable cyclical unemployment. When actual real GNP is considerably below the level that corresponds to potential real GNP, there will be cyclical unemployment and idle capacity. Under such circumstances aggregate production can increase without much upward pressure on unit costs. If the economy is operating in this segment, business firms can produce more simply by bringing idle plant capacity and equipment back into service. It's also easy to obtain materials and labor under such circumstances so that output can increase without increasing the costs of additional units of output. In segment 1, there is considerable slack in the economy and, other things being equal, little or no increase in the price level will suffice to increase aggregate quantity supplied. Segment 2: The economy is close to full employment. As the idle capacity is eliminated and an economy is approaching the level of aggregate production corresponding to potential real GNP, costs of additional units of output begin to rise more quickly. Under such circumstances more substantial increases in the price level are necessary to induce firms to increase aggregate quantity supplied. It follows that, as the economy approaches full employment, inflation will heat up if aggregate quantity supplied increases further. Segment 3: The economy is overheated. The level of real GNP supplied will exceed potential real GNP. Unit costs of production will rise very rapidly and much higher prices will be necessary to cover those higher unit costs if the economy is to produce more. An economy operating at the beginning of the year in the nearly vertical portion of its aggregate supply curve will be bursting at the seams through overproduction.